The building and equipment rental markets are stronger than expected in 2018 and that's helping McGrath RentCorp (MGRC +1.98%) drive outstanding results. The company reported first-quarter 2018 earnings after the market closed on Tuesday, and top- and bottom-line performance should be enough to impress any investor.
What's surprising about McGrath RentCorp's performance right now is that all of its business segments are performing well. That's a rarity for a business serving everything from the education market to telecommunications and the oil industry, and if it continues, this stock could be a big winner for long-term investors.
Image source: McGrath RentCorp.
McGrath RentCorp: The raw numbers
| Metric | Q1 2018 | Q1 2017 | Year-Over-Year Change |
|---|---|---|---|
| Sales | $105.1 million | $94.8 million | 10.8% |
| Net income | $14.5 million | $8.0 million | 81.4% |
| Diluted EPS | $0.59 | $0.33 | 78.8% |
Data source: McGrath RentCorp's Q1 2018 earnings release.
What happened with McGrath RentCorp this quarter?
The headline numbers were impressive, but segment numbers showed surprising diversity in the company's growth. Mobile modular revenue has driven the company for the last few years, but in the first quarter, TRS-RenTelco (telecommunications) and Adler Tanks (energy) revenue saw improvement as well.
- Mobile modular rental revenue was up 10% to $37 million on a 9% increase in rental rates. Operating income was up 42% to $12.3 million as gross margins improved from 30% to 36%.
- TRS-RenTelco rental revenue was up 9% to $21.5 million on a 7% increase in utilization. Sales revenue was also up 18% to $5.2 million. Income from operations for the division jumped 27% to $7.2 million.
- Adler Tanks rental revenue was up 8% to $15.7 million and operating income rose 40% to $3.2 million.
The tax cut Congress passed last year helped the bottom line as well.
- Of the $0.26 increase in diluted earnings per share, $0.11 was due to the lower tax rate from the Tax Cuts and Jobs Act passed in December.
- Management increased operating profit growth guidance for 2018 from a range of 8%-12% to a range of 11%-15%, indicating they expect financial conditions to continue improving.
What management had to say
What's remarkable about the quarter is that McGrath RentCorp grew revenue by double digits without investing significantly in new equipment during the quarter. In the quarter, $24.2 million was invested in rental equipment -- about the same pace of investment as the company had in 2017.
"We continue to execute on our performance improvement initiatives," said CEO Joe Hanna. "We are driving better performance from our fleet without significant new equipment investments and we are encouraged by our progress."
If the strong pricing and utilization rates continue throughout 2018, we could see McGrath RentCorp surpass its new operating profit growth guidance.
Looking forward
Mobile modular revenue has grown consistently over the last few years. What seems most promising for McGrath RentCorp is the increase in demand for telecommunications equipment and tanks used in the energy industry. Given the tailwinds from 5G investments in telecommunications and increased drilling because of high energy prices, I think the future looks bright for this rental equipment giant.
